Big pension costs also a burden for other states

Big pension costs also a burden for other states

Arizona has problems with its public-pension systems, but some states have more dire concerns as their pension trusts teeter on the brink of insolvency.

Three states have taken the unusual step of stopping cost-of-living raises for public employees already in retirement, while a few others have required employees to work longer to claim their benefits.

One of the reasons Arizona's pension trusts are in better shape than those in some other states is because their protection was mandated in a public vote 12 years ago. That vote may be coming back to haunt Arizona taxpayers, as it forces them to pay a growing share of the cost for those guaranteed benefits.

Arizona's six publicly funded pension systems are in no danger of going broke anytime soon, pension managers say. Yet, the four statewide systems and municipal plans in Phoenix and Tucson are underfunded, causing increases in publicly financed contributions from government employers during the past 10 years to help cover benefits.

Arizonans are paying roughly $1.39 billion from public treasuries this fiscal year to resuscitate the ailing systems that provide lifetime annuities for more than 111,000 retirees. The public's tax-paid contributions outpace what the state spends on prisons, higher education or health insurance for the poor.

Other states, which also are cutting public services amid a stubbornly weak economy, face similar funding shortfalls in their pension systems.

The Pew Center on the States, a Washington, D.C., non-profit organization that focuses on public policy, released a study earlier this year saying there was a $1 trillion gap between what states have been setting aside to pay for employees' retirement benefits and how much will actually be needed to pay for those benefits in their entirety in the future.

The shortfall amounts to more than $8,800 for every U.S. household, and is expected to be made up during the next 30 years by state and local governments through a combination of careful management, productive investments and larger contributions from members and their employers.

In addition to the Pew study, Northwestern University professor Joshua Rauh, who studies public pensions, released a report this year that predicts pension funds in at least seven states could face difficulties meeting their liabilities by the end of 2020 because contributions to the trusts were insufficient in recent years and investment income plunged during the market downturn.

None of Arizona's is among them.

Rauh predicts that taxpayers will bear a larger share of the financial burden to make pension trusts whole again, and he believes the federal government could be called upon to bail out financially insolvent states.

Some action, however, must come from states themselves.

Keith Brainard, research director for the National Association of State Retirement Administrators, said some states are dealing with pension liabilities that they can't afford by raising retirement ages, increasing employee and employer contributions into their pension trusts, and scaling back benefits.

Brainard said Colorado, Minnesota and South Dakota have rolled back automatic cost-of-living adjustments for current retirees, though lawsuits have been filed objecting to those moves.

May be even bleaker

While the Pew study paints a bleak picture for the future of public-pension financing, one of its key researchers said the situation likely is worse than portrayed.

Kil Huh, director of research for Pew, said the study was based on fiscal 2008 data that did not capture potentially crippling financial losses that public-pension systems absorbed during the stock market slide at the end of 2008 and into 2009.

"Our numbers were very conservative," Huh said. "We missed the Wall Street crisis that really hammered assets for major investment and pension plans. We know the picture has deteriorated and gotten worse."

In 2000, Huh said, more than half of the states had fully funded public pensions. When the report came out last February, there were only four: New York, Washington, Florida and Wisconsin.

Today, he said, it is down to Wisconsin.

Pew's report called Arizona a national leader in managing its long-term liabilities for pensions and retiree health-care benefits, saying it funded 80 percent of its total pension bill, the minimum benchmark that the U.S. Government Accountability Office says is preferred by experts. At 100 percent funded, a pension would have enough money to meet all current and future pension payments.

More recent data, however, shows the Arizona State Retirement System, the state's largest, is only 75 percent funded, while pension plans for Arizona's public-safety officers, elected officials and Phoenix municipal employees are below 70 percent.

While Arizona's funding ratios have dropped, Huh said, the state is in better shape than some of its peers because it has a constitutional mandate to fund pension plans.

Pensions protected

The Grand Canyon State has iron-clad protections for public pensions, despite its reputation for fiscal conservatism and a penchant for lagging in funding of public services and education.

In 1998, the Republican-controlled Arizona Legislature asked voters to approve Proposition 100, a constitutional amendment that prohibited lawmakers from raiding any of the public-employee pension trusts for extra cash to balance the state budget.

At the time, all four of the statewide public-employee trusts were overfunded, with surpluses ranging from 14 to 21 percent, because of the huge stock-market growth during the 1990s.

Those surpluses meant that the trusts had far more assets than needed to meet then-current and projected retirement payments. Overfunding also meant governmental agencies could reduce the amount of cash they paid into the trusts, saving money for taxpayers.

Proposition 100 not only kept lawmakers' hands off the trust funds, but mandated that public-employee pension benefits "shall not be diminished or impaired." The ballot measure passed with a 61 percent approval rating.

Arizona is now one of nine states where participants in public pensions have a guaranteed right to a benefit that cannot be eliminated or diminished, according to the GAO.

Marc Spitzer, now a commissioner with the Federal Energy Regulatory Commission, was then an Arizona lawmaker championing the legislation.

Spitzer said all of Arizona's pension systems were funded at more than 100 percent in the late 1990s, and he was concerned then that the Legislature would raid the funds to pay for state programs.

"There is an insatiable appetite to spend money whether times are good or not. There were people going to members of the House and Senate who wanted their programs funded, and I didn't want it at the expense of the retirement systems," Spitzer said. "I didn't want the retirement systems punished for being properly managed."

Spitzer, a Republican, said the measure had bipartisan support. And, he added, the Legislature established cost-of-living increases for the pension systems.

Today, Spitzer still thinks those protections and increases were a good idea, despite the fact that the trusts are now underfunded.

He said the state has a responsibility to protect pension funds.

"It was a contract, and I didn't want the contract overridden by some other legislation," Spitzer said.